A firm has 500 million of total assets, its basic earning power is 15% and it cu

Question

A firm has 500 million of total assets, its basic earning power is 15% and it currently has no debt in its capital structure. If a recapitalization of debt is issued at a cost of 10% and use the proceeds to buy back shares of the company's common stock paying book value. If the company proceeds will recapitalization its operating income, total assets, and tax rate will remain unchanged. Which of the following is most likely to occure as a result of the recapilization? 1) The ROA would increase 2) The ROA would remain unchanged 3) The basic earning power ration would decline 4) Basic earning power ratio will increase 5)ROE would increase

Explanation / Answer

3) The basic earning power ratio would decline

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